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Elliott Wave Theory Tutorial – “Bullish Market Scenario”
by Christian Shepard
I am writing this tutorial to show the basics of Elliott Wave Theory. I will not
show all the different variations of corrective waves and some other more advanced
charting of Elliott Wave Theory. I recommend reading more complete
Elliott Wave Theory material that will show all the intricacies involved in the
Theory. I have listed other resources in my Information and Link page of
shepwave.com.
Elliott Wave Theory was discovered by Ralph Nelson Elliott in the 1930’s. He
came to the conclusion that the markets don’t move in random movements and
that directional changes have a correlative relationship with other
directional movements in many different time frames. His methods can explain
all the movements of any market in history. This gives the Elliottician a better
understanding of the future direction of the market.
Basically markets move five waves in the impulsive or motive direction and
three waves in the corrective direction. The drawing below shows how this
basically looks. I have written this tutorial as an example for a bullish
market scenario. For bearish market simply invert drawings.
Note that waves 1,3 and 5 are motive. Moving in the direction of the trend for
the entire five wave move.. Waves 2 and 4 are corrective and usually don’t
violate the starting point of the previous motive wave.
Figure 1
The view of the chart above can be used to describe any time frame.
Basically a one minute chart of a market will display the same characteristics
of a weekly chart of the same market. The motive or impulse directional
waves will be able to subdivide into five waves of a smaller or larger degree.
In a corrective wave the wave could have impulsive/motive waves that can be
broken down into a five wave move within the three wave corrective move of
a larger degree
The drawing above shows how a five wave move subdivides.
One can keep going to a smaller or larger degree and get the same wave look.
Corrective patterns are what give most Elliotticians the most problem. They
can have complex patterns that sometimes are difficult to indentify until they
are finished. There are basically three types of corrective wave formations.
The Zig Zag is a 5-3 5 wave formation. A Flat correction is a 3-3-5 wave
formation and a Triangle is a 3-3-3-3-3 formation. Figures 3, 4 and 5 will show
simple examples of these types of corrections. There are also corrective
patterns that will unfold as a combinations of one or more corrective patterns.
The corrective patterns shown in Figures 3,4 and 5 occur in waves 2 or 4 of
corrective wave formations of varying degrees. The drawings show the basic
patterns for each simple correction. Corrections can have combinations of
simple corrective patterns. I will not get into that in this Elliott Wave Tutorial.
I suggest further study of these patterns and other complex Elliott wave formations.
I will refer to these patterns often in my updates.
Elliott Wave “Rules”
There are a few basic rules that wave counts need to follow to be considered
Impulsive Waves. The basic rule is that wave 4 cannot violate wave 1. That is;
wave 4 cannot go into the territory of wave 1. That would make it a motive
wave and not an impulsive wave. Also, wave 3’s of an impulse pattern are
usually the longest wave and never the shortest. There are numerous variations
of wave extensions. But those are the basic rules.
For further study one needs to keep in mind that waves usually have a
relationship in length and even time. I use fibonacci ratios to compare relative
wave lengths and retracements in my updates. Go to shepwave.com Educational
and Research Link to get further information of these ratios.
As mentioned in various sections of Shepwave.com there are plenty of
resources to gain knowledge of Elliott Wave theory. I mention Robert Prechter
Jr. frequently and suggest every one read his book “Elliott Wave Principle” along
with his other publications. The website elliottwave.com is a great site to find
information. Another website that I suggest is Wavespeak.com. They also
have a free Elliott Wave Tutorial. I recommend reading it as well.
Good luck in your trading and investments,
Shep
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